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Is VeriFone Destined for Greatness?

Let's see what the numbers say about VeriFone (PAY).

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does VeriFone(NYSE:PAY) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for The graphs you're about to see tell VeriFone's story, and we'll be grading the quality of that story in several ways:

Growth: Are profits, margins, and free cash flow all increasing?

Valuation: Is share price growing in line with earnings per share?

Opportunities: Is return on equity increasing while debt to equity declines?

Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you Now, let's take a look at VeriFone's key statistics:

How we got here, and where we're going VeriFone falls short of a standout score because of weakness in its free cash flow and a far weaker return on equity -- although that latter metric was at abnormally high levels during the start of our tracking period. Still, three years of consistent declines might be a warning sign. Can VeriFone increase its score from 4/7 the next time we examine it? Let's dig a little deeper.

VeriFone's latest earnings seemed to cheer investors, though (now former) CEO Douglas G. Bergeron said that results were below expectations, and it's a bit hard to see why. Maybe the market expects VeriFone to improve now that Bergeron is out of the executive suite -- the company cut its guidance for the first half of the year, so the new CEO had better bring a good long game. Previously, VeriFone has been squashed under lousy guidance and poor results because of (what else?) European weakness. This has happened twice in the last few months, so it may not be proper to expect much of a new CEO right now. No one man can restart Europe's economic engine, after all, let alone the CEO of a smallish payment services company.

Part of VeriFone's problem -- and perhaps its largest challenge -- will lie in upending or supplanting the existing mobile payments infrastructure, much of which has grown around eBay's (NASDAQ:EBAY) PayPal, which has been pushing mobile-based payments for years. Groupon(NASDAQ:GRPN) has also executed a major business shift toward payments processing, but it's tough to call the erstwhile daily deals leader VeriFone's biggest competitor. VeriFone would like to move into this space, but it's also a threat to the company's bread-and-butter point-of-sale payment systems.

One reason to invest in VeriFone today, according to a recent Bloomberg report, is that the company is now so discounted that it might be an attractive buyout target. This might not produce as much return as a long-range turnaround, but any gains are better than none!

Putting the pieces together Today, VeriFone has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

Author

Alex Planes specializes in the deep analysis of tech, energy, and retail companies, with a particular focus on the ways new or proposed technologies can (and will) shape the future. He is also a dedicated student of financial and business history, often drawing on major events from the past to help readers better understand what's happening today and what might happen tomorrow.